FAQ

Frequently Asked Questions by Prospective Investors

Here are answers to the most frequently asked questions regarding investments in single tenant, triple net properties. If your question is not listed, please contact Horn Capital Realty, Inc. at 305-864-2000 for prompt information.

Net-Lease (NNN) transactions is typically described as a free-standing facility occupied by a single-tenant on a long-term triple-net lease. A NNN can be described as a bond-like investment encompassed by real estate.

A NNN can be structured in three ways:

Sale-leaseback financing is structured through the sale of a property owned by a tenant who sells it to an investment group and leases it back on a long-term lease.

The sale of an existing NNN property leased to a tenant owned by a third party investor.

Build-to-Suit. A developer enters into a long-term agreement with a corporate tenant and then sells the transaction upon completion of the development or before.

The corporate tenant signs a negotiated NNN Lease for a period of 10 to 25 years. Initially, the rent equals to 5% to 10% of the contracted sale price. Most often, the rate is credit-driven and constant. Some leases contain scheduled rent increases.

A. A NNN lease frees the investor/landlord from any property responsibility. The single tenant agrees to pay all costs associated with the property use and occupancy, including real estate taxes, insurance, improvements, on-site property management and maintenance.

There are three main types of triple-net leases found in net-leased transactions. The tenant is all of these is responsible at a minimum for paying all costs associated with the property use and occupancy, real estate taxes, insurance, improvements, on-site property management and maintenance.

“Bond-Type” lease or “hell or high water” lease is where the tenant is responsible for roof, structure, etc. regardless of condemnation, casualty, etc.

“Absolute” triple-net leases, where the tenant is responsible for roof, structure, and parking.

“

Double-net (NN)” leases, where the landlord is responsible for roof and structure.

The lease names vary across the country and in different finance circles.

Property depreciation tax-shelters a portion of the annual cash return;

The value of the real estate frequently appreciates during the lease term;

Minimal risk with investment grade tenants;

Opportunity for higher cash returns from less than investment grade tenants;

nvestor owns property with zero on-site management responsibilities;

nvestor does not pay for property insurance, maintenance, improvements or taxes;

At any time the investor can cash-out, often with a profit, by selling the property. The investor also can hold the property, allow it to further appreciate in market value, and lease it again at a higher rate to the original tenant or a new tenant when the lease term expires.

A. Currently, 6% to 10% per annum plus a conservative 2% to 5% annually compounded, property appreciation for every year the real estate is owned.Therefore, the internal rate of return on a 15 year all cash investment, including tax savings, can be greater than 12% per annum.

A. A single tenant, triple-net lease is usually a passiveinvestmentwith a credit worthy, corporate tenant. Most residential and commercial rental property investments such as office buildings, apartments and mini-warehouses have multiple tenants and the real estate owner must pay operating expenses and provide on-site management. The owner leases out individual units for short terms, renovates each premises, collects the rent, pays the property taxes, maintains the property, and is responsible for all insurance, legal, accounting and other expenses.

With a single tenant, triple-net lease agreement the large corporate tenant agrees to be responsible for all of the expenses associated with the ownership of the property in return for a long term lease. The investor/owners role is passive – like a “coupon clipper” bond type investment. The investor just collects and records regular lease payments.

An added investor/owner benefit can be property improvement over the term of the NNN lease. Corporate tenants usually improve the appearance and functionality of their leasehold in order to be more successful with their clients or customers. And, their leasehold is always well maintained.

A. Investors should evaluate the financial strength of each prospective tenant on its own merit and as a competitor in its industry. Investors also should consider the long-term stability of the tenant and that industry during good economies and recessions. Industries that provide basic products and services are usually recession proof.

Then, the investor should carefully review the prospect’s financial statements and management team. The team should have a long-term successful track record, and the statements should display consistent profits and growth, and the prudent allocation of financial resources.

A. The cap rate (or annual income divided by purchase price) from a triple-net lease property currently varies from 5% to 10% depending on the financial strength of the tenant. For example, a new franchisee would be considered the highest risk. A multi billion-dollar profitable corporation with good management, that has always fulfilled its lease obligations, would be the lowest risk and earn the lowest rate.

A. Yield is calculated differently by each individual investor. Some investors use the following as their main analysis:

Cap Rate- the unleveraged return- does not take any tax or depreciation into consideration.

Cash-on-cash return- the leveraged return- does not take any tax or depreciation into consideration.

A portion of the cost of the property is allocated to the building and the balance is allocated to the land. For tax purposes the owner may depreciate the cost of the building over a designated period of time. Therefore, the portion of the annual cash-on-cash return, which is no greater than the annual depreciation, is sheltered from Federal income taxes.

Traditionally, well maintained real estate will substantially, appreciate in value over a long period of time. The compounded annual appreciation rate as a percentage of property cost is added to the cash-on-cash rate of return and the depreciation tax-shelter benefit to produce a total yield on the cost of the property.

A. The single tenant maintains and manages the property on-site. The tenant also insures the real estate, pays property maintenance expenses and pays the property taxes directly to the taxing authority.

The investor/landlord receives deposits and records all lease payments from the tenant. And, to be prudent and reduce risks, the investor should periodically check with the taxing authorities to verify timely receipt and payment of all tax obligations. The investor also should periodically search the title to the property to make sure that no liens or other encumbrances have been negligently filed against the property.

The investor/landlord must receive current endorsement certificates from the tenants property and liability insurance carrier indicating that the policies are in force and that the limits of the policies are sufficient to cover risk, the current market value of the property, and that the investor/owner is named as the additionally insured.

A. The major risk would be a tenant default – bankruptcy, reorganization, etc. However, usually prior to a total default a tenant would become a slow pay and communicate to the investor/landlord that there is a problem. This would provide the investor with options on how to effectively resolve the situation. For example, the investor could default the tenant, cancel the lease and re-lease the property to a new, credit worthy tenant at an equal or higher rate. Or, the investor might sell the property for a profit and reinvest the gain in other real estate.

If an investor/landlord does not act quickly at the first signs of financial difficulty, his options would be severely limited. The tenant might be forced into an involuntary bankruptcy, thereby drawing the investor/landlord into the litigation and the monthly income stream from the property would be interrupted. If an investor is careful when selecting a large, high quality, stable tenant for sale-leaseback investment, defaults rarely occur.

At all times the investor/landlord owns the real estate including the land, buildings and improvements. Sometimes, a lease might include a security clause in which the tenant’s equipment is pledged as additional lease collateral. If a tenant defaults, the investor/landlord could then seize the equipment.

A. Most often, when the tenant’s original lease expires, the investor/landlord will own the property free and clear. At that time, the investor/landlord can once again lease the property to the existing tenant or a new tenant, usually at a higher market rate, for a much greater return. Or, he can sell the property, for its current, appreciated market value, to the existing tenant or a new prospect.

They also might sell the property to a developer to be renovated for a higher and better use or to be utilized in a redevelopment master plan.

Usually, since the property is well maintained, well built and favorably located, the market value of the real estate will have appreciated significantly. Therefore, regardless of which alternative the investor/landlord chooses, the investor should benefit from either a cash sale or a new lease with a higher cash-on-cash rate of return on his investment.

A. Initially, most leases do include a renewal option beyond the original 10, 15 or 25 year term. Sometimes, if a tenant does not have a renewal option and when that tenant extensively remodels and improves the property during the term of the original lease, the investor/landlord might agree to a 5 or 10 year extension at a negotiated rate.

* Investors should always use competent tax and legal experts prior to investing in real estate.

*THE TRADEMARKS AND SERVICE MARKS OF THE TENANTS LISTED HEREIN ARE OWNED BY THE APPLICABLE TENANT, ARE DISPLAYED FOR INFORMATIONAL PURPOSES ONLY AND DO NOT IMPLY AN ENDORSEMENT BY OR AFFILIATION WITH SUCH TENANTS.